Market picks rates to rise earlier than RBNZ forecasts

Economists have been a little bit surprised about the market's reaction to last week's official cash rate announcement, particularly the consequent rise in the New Zealand dollar and pricing in an earlier rise in mortgage rates than the Reserve Bank is forecasting.  

Tuesday, June 16th 2009, 6:59AM

ASB economist Jane Turner says "market reaction to the Monetary Policy Statement was marked, with swap rates soaring on the day. The market response looks overdone relative to the message the RBNZ gave."

She says that although the RBNZ left the OCR at 2.5% there is "still a good chance" the central bank will cut rates again.

However, ANZ economists, in their weekly Market Focus report, pick 2.50% to be the trough for the OCR.

It also notes "there is a massive disconnect between market pricing and the RBNZ's stated policy view. While we expect a ‘gap' to remain based on historical trends, we nonetheless expect the magnitude to close towards the RBNZ view."

The point it is making is that the RBNZ said it expected to keep rates at current levels until late 2010, but an increase in swap rates after the announcement suggest the market is picking rate rises early next year.

BNZ Capital also notes the market is picking rate rises to come earlier than the RBNZ forecasts.

Meanwhile Westpac agrees we at at the end of the easing cycle.

"For those borrowers currently on floating rates who have been looking to time their re-entry into fixed rates, we recommend fixing now for six months to one year, which are easily the most favourable rates on offer."

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